Archives for March 13, 2020

Seniors who are eligible for Social Security can claim benefits as early as age 62, or as late as age 70. In fact, 70 technically isn’t the cutoff for claiming benefits — you can file after age 70 if you so choose, but there’s no financial incentive to go that route.

Meanwhile, eligibility for Medicare begins at age 65, and as such, many people make the decision to enroll in Medicare and start collecting Social Security at the same time. But doing so is a mistake you might ultimately regret.

The problem with claiming Social Security at 65

Your Social Security benefits are calculated based on your earnings during your 35 highest-paid years in the workforce, and you’re entitled to receive your full monthly benefit once you reach full retirement age, or FRA. Here’s what FRA looks like:

Year of Birth	Full Retirement Age
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 or later	67

DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.

As you can see, 65 is well ahead of FRA even if you’re on the older side, and while you’re allowed to claim benefits starting at 62, there’s a downside to filing before FRA (or filing early, as many call it). Specifically, for each month you take benefits ahead of FRA, they’ll be reduced for life. If your FRA is 67 and you start receiving Social Security at 65, you’ll lose 13.34% of your benefits, and while that may seem like a small price to pay for getting your money sooner, it could also prove problematic if you’ll be counting on Social Security to provide most, or a lot, of your retirement income.

Imagine you’re entitled to $1,500 a month in Social Security (which is roughly what the average recipient gets today) at an FRA of 67. Filing at 65 will give you $1,300 a month instead. Will you miss that $2,400 a year? If you don’t have a lot of retirement savings, probably. The same holds true if your healthcare expenses come in higher than anticipated — which could easily be the case if you develop a chronic condition, or if Medicare costs continue to rise as they’ve been doing for years. As such, you shouldn’t rush to claim Social Security simply because you’re signing up for Medicare. Doing so could slash your most substantial income stream on a permanent basis for no good reason.

Remember, too, that you absolutely don’t have to sign up for Social Security and Medicare simultaneously. There’s no problem with enrolling for Medicare at age 65 and waiting until FRA or beyond to begin collecting Social Security. The only thing you do need to know is that if you’re on Medicare alone, you’ll be responsible for paying your monthly Part B premiums yourself. If you’re on Social Security, those premiums get deducted from your benefits, which makes your life a little easier — but not so much easier that it’s worth giving up hundreds, or even thousands, of dollars a year.

Of course, in some cases, claiming Social Security at 65 does make sense. For example, if that’s the age you’re forced to retire (say, because of a layoff) and you need that money to pay your bills, then delaying your filing could cause you to rack up debt, which you don’t want to do. Similarly, you may just decide that you’ve saved well enough to retire completely at 65 and collect Social Security at that point to pay for leisure and entertainment, even if that means lowering your benefits in the process. But one thing you shouldn’t do is sign up for Social Security at 65 simply because you’re enrolling in Medicare, since clearly, it’s possible to do the latter without the former.

As the stock market sinks, you’ve probably already heard not to check your 401(k).

Yet when it comes to steering your personal financial plan in a turbulent time, it’s still wise to take a proactive approach, according to Michael Liersch, a behavioral finance expert and global head of wealth planning and advice at JPMorgan Chase.

Generally, people tend to take one of two strategies to uncertain markets, Liersch said. Either they decide on action no matter what or stick to a do-nothing approach.

Those extreme approaches tend to happen when individual investors get too caught up in the short-term news, and forget their long-term time horizon.

“What I always coach investors, clients, advisors to do is really to empathize with themselves,” Liersch said. “If we didn’t feel anxious, that would be unusual.”

Start by acknowledging that emotion, telling yourself it’s OK feel this way, Liersch said. Next, and importantly, remind yourself of your individual goals and objectives.

That includes revisiting what you’re trying to achieve, how much you need to have in your investments for your goals and the time horizon over which you plan to stay invested.

For example, if you’re 50 and planning to retire in 15 years at age 65, you want to invest more, not less, in order to successfully get to where you want to be.

“Those kinds of anchor points help people understand whether those short-term feelings and what they’re seeing in the news really translates into actions and decisions they should make in their portfolio,” Liersch said.

Here’s what to ask yourself before you make any immediate investment moves.

Assess your capacity for risk

Once you’ve identified your goal — the reason why you’re investing the money — ask yourself how much risk you need to take on to successfully reach it.

Let whether or not you need to take risk be your guiding principle, Liersch suggested.

“If you need to take risk, really the answer is to potentially re-evaluate your portfolio or re-establish if the strategy you’re in is working for you,” Liersch said. “It’s not necessarily to no longer take risk.”

Look at your cash flow needs

If you have short-term cash flow needs, you may need money from your investments now.

But if your time horizon is longer, then you have a higher capacity to take chances.

“Looking at that balance between the need to take risk and the capacity to do so can help investors understand whether those market dynamics are really relevant to them or not,” Liersch said.

Do an emotional gut check

Lastly, assess how the market swings change your personal tolerance for risk.

While it is important to empathize with yourself and recognize the emotions you feel amid market turbulence, that shouldn’t be your first priority, Liersch said.

Instead, let your goals drive your investment decision making.

“I would just encourage investors to always be engaged,” Liersch said. “Instead of making the markets the starting point for the evaluation, go back to the objective or the goal as the starting point.”

Might millennials be saving too much for retirement?

The question seems ludicrous, given the drumbeat of messages that all of us, but especially millennials, are saving too little for retirement. Yet the suggestion to the contrary appeared this past Sunday in no less distinguished a publication as the New York Times, in an article entitled “How Millennials Could Make The Fed’s Job Harder.” It asserted that the millennials’ “retire early” movement is “the Federal Reserve’s nightmare,” since it could lead to such a burst in savings that interest rates would fall lower and the economy become weaker than the Fed is hoping.

And then, a few days later, Nationwide Advisory Solutions released its fifth annual Advisor Authority study under the headline “Are Millennials better prepared for retirement than Gen Xers?”

Why this sudden shift in messaging?

Of course, the Times is not wrong in noting the theoretical possibility that the millennial generation could increase their savings rate so high as to have a significant impact on the Fed’s policy options. But a theoretical possibility is not the same as a likelihood.

For example, I wonder why the same worry about saving too much was never expressed about Generation X or baby boomers, even though the theoretical possibility existed for them as well. The only reason I can see for treating millennials differently is that a higher percentage of them say they expect to retire early. According to a T. Rowe Price survey that is mentioned in the Times’s article, 43% of millennials expect to retire before 65, compared with 35% for Gen-Xers and 17% for baby boomers.

But a fantasy about retiring early is not the same as being realistic. The millennials’ intent to retire early is mostly a triumph of hope over experience. They may say they expect to do so, but in fact they are even further away from being able to do so than prior generations.

Consider data from the Fed’s triennial Survey of Consumer Finances, as tabulated in a recent study conducted by William Gale, a senior fellow in the Economic Studies Program at the Brookings Institution; Hilary Gelfond, a graduate student at Harvard’s Kennedy School of Government; and Jason Fichtner, a senior lecturer at Johns Hopkins School of Advanced International Studies. The researchers compared the median net worth of 25- to 35-year olds in the most recent survey with what it was for this age cohort at different times over the last three decades.

Notice from the accompanying chart that this age cohort is worse off today than at any other time since 1989, with the exception of 2010 and 2013 (no doubt because of the bull market over the last decade). In fact, the recent median net worth of the 25 to 35 age group is barely half of where it stood in the mid- to late- 1990s, when this cohort reflected Generation X.

Clearly, millennials are not better prepared for retirement than prior ones. And the Fed has nothing to worry about from this generation’s savings habits.

Millennials’ retirement challenge

To be sure, it’s possible that millennials are worse off than previous generations but still saving more than they. So I now want to focus on whether millennials are in their own right likely to retire comfortably.

The answer: Not very.

In fact, according to a study by the Urban Institute, 40% of millennials will experience a major reduction in standard of living when they retire. By “major” the study’s authors mean the inability to replace at least 75% of “the inflation-adjusted average annual earnings they and their spouse received from ages 50 to 54.”

This is sobering enough, but there’s more. Consider a National Retirement Risk Index (NRRI) that is calculated by the Center for Retirement Research at Boston College. The Index represents the “percentage of working-age households that are at risk of being unable to maintain their preretirement standard of living in retirement.” The Center recently analyzed what it would take to significantly reduce the NRRI and found that it isn’t going to be easy. Even with herculean effort, such as doubling the yearly contribution to a 401(k) or IRA, the NRRI will remain elevated.

The one change that Boston College study found to lead to the biggest reduction in the NRRI is working longer. “The only way to dramatically reduce the percentage of households at risk is to increase the age at which people retire,” the authors write.

Notice what that means: But for the select few who have both the means and discipline to actually save so much as to realistically retire early, the rest of us need to expect that we’ll be retiring at a later age, not earlier.

March is Women’s History Month, so I thought it might be a good time to focus on how women are doing when it comes to planning for retirement. In my business of working with many federal employees who are in various stages of planning, I find an increasing number of women who are the breadwinners for their families or single women who are providing for themselves while planning for retirement.

For a long time, women were considered to be in a position of dependency when it came to retirement considerations. As a Social Security bulletin noted in 1972: “As early as 1939, the Social Security Act was amended to strengthen protection for families by providing benefits for the dependents and survivors of insured workers. In an attempt to avoid detailed investigations of family financial relationships, it was decided to base dependency determinations on thethen generally accepted presumption that a man is responsible for the support of his wife and children.”

According to a 1993 Social Security bulletin, as late as 1940, about 80 percent of married women were not in the labor force at the time they were married. Gradually, more of them remained employed until they began to have children. It was only after World War II that for the first time women in large numbers re-entered the labor force as their children were growing up, and gradually did so after progressively shorter intervals. In time, a growing minority of women remained in the labor force even during their childbearing years. 

As this Office of Personnel Management analysis notes, programs that help women—and men—balance their work and family lives have expanded in scope and are becoming more popular. And the gap in pay between men and women in the federal workforce has been steadily closing as women assume a greater percentage of managerial roles. As of 2014, 44 percent of managers between the ages of 25 and 34 were women. That’s not quite half, but it’s higher than the percentage for older women. Of supervisors and managers between the ages of 55 and 64, 35 percent were women in 2014.

Still, according to recent data, women are much more likely than men to have a savings shortfall in retirement, largely because of their lower lifetime earnings. By extension, they’re also more likely to rely exclusively on Social Security for their living expenses in retirement. 

Thanks to the Civil Service Retirement System and the Federal Employees Retirement System, federally retired women have an earned pension benefit in addition to Social Security (or, in the case of many CSRS retirees, the benefit takes the place of Social Security).

Beyond their federal pensions, what can women do to secure their retirement? The Women’s Institute for a Secure Retirement provides a retirement planning checklist for women, but since it wasn’t geared specifically to federally employed women, I came up with a list of questions that these women should ask themselves, divided into several categories:

Retirement Benefits

• Do you know when you will be eligible for retirement under FERS or CSRS?
• If you are married, have you evaluated the cost and benefit of providing a survivor annuity to your spouse?
• Do you know what happens to your benefit if you leave federal service before being eligible for an immediate retirement? Do you know when you would be eligible for a deferred retirement?
• Do you know what happens to your benefit if you retire early? Do you know how cost of living adjustments are applied?
• Have you computed how much of your net income will be replaced by the net value (after possible reductions for age, survivor elections, court-ordered former spouse benefits, service credit deposits, and withholdings for taxes and insurance) of your government pension at your desired retirement timeframe? 

Social Security

• Do you know how much of your retirement income will come from Social Security that you have earned for yourself compared to what a spouse, deceased spouse or former spouse may have earned for you? 
• Have you considered the optimum time to claim Social Security retirement benefits?
• Have you considered whether your Social Security benefit will be subject to income tax?

Thrift Savings Plan

• How much will you need to withdraw from your savings to meet your retirement income goals?
• Are your savings on track to last as long as you need them to? 
• Have you considered whether you need to engage with a financial professional to help you manage your investments to achieve your financial goals?

Insurance

• If you are nearing age 65, have you considered the cost and value of making changes to your health insurance and the option of adding Medicare coverage (parts A and B)?
• Have you evaluated your life insurance coverage and updated your beneficiary designation?
• Will you be able to continue health insurance for you (and your spouse, if needed) after retirement?
• Have you thought about long term care and how you would provide care for you or your spouse, if needed?